Partial Sales & Use Tax Exemptions for Manufacturers
A term that business owners and management love to hear and one used by states to reward businesses for conducting business within their borders is “Business Friendly”. As part of these efforts, many states, including California, offer special business tax incentives for hiring new employees, creating new jobs and even qualifying equipment purchases. While most manufacturing companies are aware of these benefits, far fewer are familiar with sales and use tax exemptions available. Although not related to traditional income taxes, these exemptions can provide significant savings for companies that purchase new equipment, repair existing machinery as well as the acquisition of material handling or pollution controls systems. To help our manufacturing clients, prospects and others understand these exemptions, and how they can be claimed, JLK Rosenberger has provided a summary below.
The state of California requires that a company meet several qualification criteria to be eligible for sales and use tax exemptions. There are three key areas where qualification is required for an exemption to be claimed, including:
- Qualified Person – This means a person (can refer to a legal entity or entity within a company) that is primarily engaged in all forms of manufacturing and research and development in engineering and life sciences at least 50% or more of the time. Primarily engaged means that a company must have derived 50% of revenue from a qualifying line of business or expend 50% or more of operating expenses in a qualifying line of business.
- Qualified Tangible Personal Property – This property is defined as property that is essential to the manufacturing, processing, refining or recycling process such as:
- Machinery and equipment parts
- Equipment used to operate, control or regulate machinery
- Pollution control systems and special purpose buildings and foundations
- Qualified Uses – To qualify, tangible personal property must be used more than 50% of the time in certain processes. These processes include:
- Any stage of manufacturing, refining or recycling, research and development, maintenance or repair of qualified tangible personal property or for use by a contractor involved in improving real property. The state defines the manufacturing process as beginning when a company receives raw materials and introduces them into the process for modification.
Exemptions for California Manufacturers
Below is a list of partial exemptions that manufacturers can claim assuming they meet the criteria listed above. These include:
- Repair/Replacement Parts – The purchase of repair or replacement parts to maintain machinery and other system parts generally qualify for the partial exemption. The parts must have an expected useful life of at least one year or more. It’s important to note that tools and other supply items are not considered parts and are not eligible for the partial exemption.
- Material Handling Equipment – Purchases of material handling equipment such as forklifts, pallet jacks and reusable company transportation may qualify for the partial exemption. The useful life of such equipment must be at least one year or more and needs to be used for handling goods through a production line in a single location only.
- Solar Power Equipment – If eligible as a qualified person, the purchase of solar panels and solar panel equipment used to primarily to run manufacturing equipment qualifies for the partial exemption.
- Pollution Control Equipment – Property purchased for use of pollution control generally qualifies for the exemption. Manufacturers that install equipment used for the reduction or removal of pollution may qualify. It’s important to note that pollution control equipment must meet or exceed local and state standards on the purchase date.
Qualifying for the partial manufacturing exemption is a complex process, but one that can lead to significant savings on qualifying purchases. If you have questions about applying for the partial manufacturing exemption, or need assistance with purchasing decisions, JLK Rosenberger can help! For additional information please contact us at 949-2860-9902, or click here to contact us. We look forward to speaking with you soon.